GM Stake Sale Not Easy for Government to Time: Corporate Canada

By Andrew Mayeda -
Oct 5, 2012

Canada may have trouble unloading its
$3.5 billion stake in General Motors Co. (GM), as there won’t be many
“buying triggers” to spur a sale, according to documents from
the agency that manages the shares.

Advisers told the board of directors of Canada GEN
Investment Corp., which oversees Canada’s and Ontario’s 9
percent GM stake, on May 16 that investor demand may be weak
given the company’s forecast for “flat performance,” board
minutes obtained last week by Bloomberg News through Canada’s
freedom-of-information law show. Directors authorized a sales
strategy on Dec. 21 that allows the agency to hire dealers to
sell the stock, according to the records.

Because the government may be seen as an insider, selling
the shares in the world’s largest automaker could “have
negative market consequences, particularly given the large size
of holdings vis-a-vis the size of the public float,” directors
were told by Canada GEN Investment executive Michael Carter.

The caution underscores the challenges the U.S. and
Canadian governments face in unwinding their ownership more than
three years after the two countries rescued the company from
insolvency. Canada is the third-largest shareholder in GM,
behind the U.S. Treasury, which holds 32 percent, and the GM-UAW
Voluntary Employee Beneficiary Association with 10 percent.
Canada and Ontario gave $9.5 billion in financial assistance to
GM in 2009, while the U.S. provided $50 billion.

The government stakes are an “overhang” on the stock
because potential buyers may be worried about the impact of so
many shares hitting the market, said Matthew Stover, an analyst
with Guggenheim Securities LLC.

“It’s kind of like the black eye that sort of hangs on you
after a fight,” Stover said in an Oct. 2 telephone interview
from Boston. “It’s not what you want to walk around the
neighborhood with.”

Retain Talent

“Over time we intend to divest,” Canadian Finance
Minister Jim Flaherty told reporters yesterday in Whitby,
Ontario. “We don’t want to be in the car business and I don’t
think Canadian taxpayers want to be in the car business so we’ll
get out of it over time.”

The government talks to the U.S. Treasury about their GM
ownership “from time to time,” he said.

GM Canada, which makes the Chevrolet Impala and Cadillac
XTS in Oshawa, Ontario, is “focused on continuing to deliver
business results, growing profitably, and creating value for all
of our shareholders,” spokeswoman Adria MacKenzie said in an e-mail. “Whether and when the U.S. and Canadian governments
choose to divest their shares in GM is up to them.”

‘Liquidity Event’

GM’s stock has declined 25 percent since it sold $15.8
billion in common shares at $33 each on Nov. 17, 2010 in an
initial public offering that reduced the U.S. government to a
minority shareholder. It was up 0.9 percent at $24.87 at 1:50
p.m. in New York today.

While the sale of the U.S. and Canadian government stakes
will represent a “massive liquidity event,” it will probably
not hurt GM’s share price too much, because investors are
already anticipating a sale, said James Albertine, an analyst
with Stifel Nicolaus & Co Inc.

“I’m actually fairly confident that the company can
withstand it,” he said in a phone interview.

The Detroit-based automaker said Aug. 3 its second-quarter
profit fell 38 percent. Rising losses in Europe and stagnating
sales in China are threatening to undercut the recovery even as
the U.S. market is on pace for its best year since 2007.

Canada GEN Investment holds just over 140 million common
shares in GM, representing about 9 percent of the outstanding
stock. The shares closed yesterday at $24.65 in New York, up 26
cents, valuing the Canadian stake at about $3.5 billion.

Sales Strategy

Canada GEN Investment sold just over 30 million shares in
the 2010 IPO, netting about $1 billion.

Most details on the sales strategy adopted by the board in
December have been censored under provisions of Canada’s Access
to Information Act protecting the country’s economic interests
and confidential third-party information.

The strategy authorized Canada GEN Investment to sell
Canada’s entire stake in any manner, including a public
offering, private sale or company buy-back.

The most likely purchaser of government-owned stock is
probably GM itself, said Stover. “They’ve got a ton of cash on
their balance sheet, so I would personally imagine the company
to be a big buyer of the stock.”

The U.S. government will probably sell its stake in GM
before the end of next year, as long as the share price remains
above $20, he said.

Directors on May 16 agreed with management to extend a
contract with investment bank Rothschild Canada Ltd. to advise
on the GM holdings. Rothschild is being paid a monthly fee of
$50,000, with a fee of $100,000 for months of “heavy
workload.”

David Drinkwater, a Rothschild executive based in Toronto,
didn’t reply to a phone call seeking comment.